Smith v. Loughman

• Decision Date: 20 July 1927
• Citation: 157 N.E. 753,245 N.Y. 486
• Parties: SMITH v. LOUGHMAN et al., State Tax Commission.
• Court: New York Court of Appeals Court of Appeals

245 N.Y. 486

157 N.E. 753

SMITH

v.LOUGHMAN et al., State Tax Commission.

Court of Appeals of New York.

July 20, 1927.

Application by Martha J. Smith, as sole executrix, etc., of Mary J. Smith, for certiorari against Michael F. Loughman, President of the State Tax Commission, and others, constituting the State Tax Commission, to review a determination of the Commission assessing a transfer tax upon the estate of Mary J. Smith, deceased, a nonresident of the state. From an order of the Appellate Division of the Supreme Court (220 App. Div. 790, 222 N. Y. S. 902), confirming the determination of the Tax Commission, petitioner appeals.

Reversed, and determination of State Tax Commission annulled.

Appeal from Supreme Court, Appellate Division, Third Department.

Joseph F. McCloy and John L. McMaster, both of New York City, Edward H. Pattison, of Troy, and Herbert W. Smith, of Larchmont, for appellant.

Albert Ottinger, Atty. Gen. (Henry S. Manley, of Falconer, of counsel), for respondents.

CARDOZO, C. J.

Mary J. Smith, a resident of the state of Connecticut, died in November, 1925, leaving real personal property which she devised and bequeathed to her four children. Included in her property was a parcel of real estate in the city of New York, of the value, above the incumbrances, of $29,490.87, the value of the share of each child being thus $7,372.72. If the testatrix had been a resident of New York, the transfer of these shares by will would have been subject to a tax of $23.72 for each, or $94.90 for all. The tax as to each would have been computed at the rate of 1 per cent. after allowance of $5,000, the statutory exemption. Because the testatrix was a nonresident, the four shares must bear a tax of $589.98. The question is whether such discrimination can be reconciled with that provision of the Constitution of the United States whereby ‘the citizens of each state’ are declared to be ‘entitled to all privileges and immunities of citizens in the several states.’ Const. U. S. art. 4, § 2.

Until the adoption of article 10-A of the Tax Law in 1925 (Laws 1925, c. 143, § 9; Consol. Laws, c. 60), the transfer tax in this state was imposed at the same rate and was subject to like exemptions and deductions whether the transfer was by resident or nonresident. The rate varied with the relationship between the testator and the devisees or legatees. A gift to a child, for illustration, was subject to an exemption of $5,000, and was taxed at 1 per cent, upon the first $25,000 of the excess, and at higher rates upon successive increments. A gift to a friend, if for not more than $500, was free from any burden, and was taxed, if for a larger sum, at rates varying with the value from 5 per cent. to 8. In the computation of the value, deductions were allowed for the debts and expenses of the estate, or the part thereof borne by the interest subject to the tax, the burden being proportioned to the clear market value of the property transferred. For the ascertainment of these facts there was need of an elaborate procedure which was laborious and at times vexatious, even when followed in the jurisdiction of the domicile. Complaints were heard at times that the vexations were excessive when the procedure had to be followed, not in one state, but in several. The ascertainment of the tax in a subsidiary jurisdiction had to wait upon the ascertainment of the debts and the winding up of the estate in the place of primary administration. This made the process of assessment dilatory and expensive, to the prejudice at times of the state and at times also of the taxpayer, whose property might be tied up until the assessment was completed. Evils such as these were from time to time recounted and deplored in the official roports of the state tax commission. They are not peculiar by any means to the assessment of taxes upon the estates of nonresidents. Many of the same hardships or inconveniences are incidental to the administration of the estates of residents. The difference is chiefly this, that the nonresidenthas an added grievance in going through the process more than once, at home and then abroad.

The Legislature of 1925, acting no doubt upon the recommendation of the tax commission of the state, split the system of transfer taxes into two parts. Under the Tax Law as thus amended, there is one scheme of taxation for transfers by residents, and another for transfers by nonresidents. The tax upon transfers by will or intestate succession, where the owner of the property was at death a resident of the state, is governed by article 10. It is substantially what it was before. The tax upon transfers by nonresidents is governed by a new article of the statute, known as 10-A. Under this article a tax is imposed whenever the subject of the transfer is ‘real or tangible personal property within this state,’ shares of stock in domestic corporations or in national banking associations located in this state, interests in partnerships doing business in this state, or capital invested in business in the state. Section 248. The tax is to be 3 per cent. of the clear market value; i. e., the value after deducting a proportionate share of the debts and expenses of administration. Sections 248-a, 248-b. If, however, the executor or daministrator prefers, he may waive the right to such deductions, and pay a flat rate of 2 per cent. Section 248-b. Such a choice will be profitable whenever the debts and expenses are less than a third of the gross estate subject to taxation. So, in the case at hand, the executrix elected to pay the flat rate of 2 per cent. if the estate was to be taxed at all. A flat rate of 2 per cent. upon the value of the gross estate is, however, a much heavier burden, as already pointed out, than the devisees would have had to bear if the testatrix had been at the time of her death a resident of New York. So it must always be when the gift is moderate in amount and goes to husband or wife or persons very near of kin. There is nothing in the record to give support to a belief that the flat rate will so lessen the cost of collection as to reinstate equality. Cf. Travis v. Yale & Towne Mfg. Co., 252 U. S. 60, 81, 40 S. Ct. 228, 64 L. Ed. 460.

Even without the alternative now offered by the statute-the alternative of a flat rate or a higher one with deductions-an executor, who found it too expensive to establish the net value of a legacy by making proof of the debts, was free; with the consent of the legatee, to abandon the deductions and pay upon the gross. Reports are necessary even now, and also appraisals of market value, and appeals where there is error. True, of course, it is that with changes in the class of donees or in the value of the gift, the comparative results will differ. For illustration, the tax on a legacy of $5,000 to a father, mother, husband, wife, or child is $100 for a nonresident, and for a resident nothing; on a legacy of $10,000, $200 for a nonresident, and for a resident $50; on one of $50,000, $1,000 for a nonresident, and for a resident $650; on one of $100,000, $2,000 for a nonresident, and $1,650 for a resident; on one of $250,000, $4,000 for a nonresident, and $4,600 for a resident. On the other hand, the tax on a legacy of $500 to a friend is $10 for a nonresident, and nothing for a resident; on one of $10,000, $200 for a nonresident, and $500 for a resident; on one of $100,000, $2,000 for a nonresident, and for a resident $5,750. The nonresident suffers in the intimate and lower schedules and gains in the remote and upper ones. Such is the setting of fact in which the legal problem is imbedded.

[1] The state does not establish the validity of this act by showing that from certain points of view or in aid of certain purposes a classification discriminating between residents or nonresidents has a basis, not wholly illusory, in policy or reason. There is no occasion to inquire whether such a showing would suffice if we were dealing with the equal protection clause of the Fourteenth Amendment, and nothing else. We deal in fact with something more. ‘The power of a state to make reasonable and natural classifications for purposes of taxation is clear and not questioned; but neither under form of classification nor otherwise can any state enforce taxing laws which in their practical operation materially abridge or impair the equality of commercial privileges secured by the federal Constitution, to citizens of the several states.’ Chalker v. Birmingham & N. W. Ry. Co., 249 U. S. 522, 526, 39 S. Ct. 366, 367 (63 L. Ed. 748). Classification may be supported by many considerations of expediency or fairness and, none the less, may be illegal if it denies to the citizens of any state the privileges and immunities that belong to citizens of another. To put it differently, equality in such circumstances is itself the highest policy, to which other policies must bow. The Constitution so commands. Few of its commands, if any, have had an influence more profound upon the attainment and preservation of the unity of the nation. Paul v. Virginia, 8 Wall. 168, 180, 19 L. Ed. 357;Travis v. Yale & Towne Mfg. Co., 252 U. S. 60, 79, 40 S. Ct. 228, 64 L. Ed. 460. Cf. Hanover Fire Ins. Co. v. Carr, 272 U. S. 494, 47 S. Ct. 179, 71 L. Ed.372.

[2] By the Tax Law of this state, an act that in any case is one and the same-the transfer of a parcel of real estate by will-is subjected to burdens of taxation that differ fundamentally, and not occasionally or in points of detail, according as the doer of the act is a citizen of one state or another. The distinction in form is between resident and nonresident; ...